Business rescue procedures and their impact on property leases

Business rescue procedures and their impact on property leases

The 'business rescue procedure' now made possible by the Companies Act for 'financially distressed' companies is likely to be used with increasing frequency in the next year or two, says Garth Watson, a director of Gunstons Attorneys.

Watson explained that a company can be placed under business rescue by its board of directors if they agree to this. However, the State has to believe that the company is indeed financially distressed and that there is a reasonable prospect of rescuing it. At the same time, any affected person may apply to court to place a business under business rescue.

The business rescue procedure, says Watson, cannot by law be implemented if the company's finances are in reasonable shape or there is no real prospect of it being rehabilitated. Furthermore, the procedure may be cancelled if the requirements set out in the Companies Act relating to such procedures are not strictly complied with.

The Act does, however, place considerable power in the hands of the company's directors regarding whether to place a company under business rescue. This decision, Watson points out, can have great financial repercussions for all those with contracts with the company – and these associated entities may have no choice but to accept non-payment or partial payment of the sums owing to them during the rehabilitation period (usually three to nine months).

A question which now arises, says Watson, is where do landlords stand should one of their tenants be placed under business rescue?

The relevant clause in the Companies Act is 134(1)(c), says Watson, states that "despite any agreement to the contrary no person may exercise any right in respect of any property in the lawful possession of the (rescue) company, irrespective of whether the property is owned by the company except to the extent that the practitioner consents to this in writing".

"Without careful review and amendment of lease agreements," says Watson, "this section may effectively leave landlords without the remedies of eviction or of suing for rent if a tenant is placed under business rescue."

Typically, he says, leases provide for landlords to be able to cancel leases if the tenant is liquidated but in a business rescue case such clauses would not suffice because during that period the tenant would be in lawful possession and s134 of the Act would prevent any rights being exercised over the property.

According to Watson, it is, therefore, imperative that the lease contains a "surgically drafted" clause that renders occupation unlawful from the date that a tenant company is placed under business rescue. This is necessary because s134 applies only to lawful possession. If, in terms of a lease agreement, the business rescue itself renders possession by a tenant unlawful, then landlords will be free to exercise their rights in respect of their properties. It is thus possible to mitigate powerfully the potentially prejudicial effect of s134 of the Companies Act, says Watson.

Gunston Attorneys Press Release


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Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!